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Common Red Flags for Mortgage Loan Underwriters

August 1st, 2014

Common Red Flags for Mortgage Loan Underwriters

Loan underwriters are like the sanity check to ensure that everything adds up, all the i’s are dotted and t’s are crossed. A “red flag” is something that doesn’t quite add up and needs further checking. In prior posts, we talked about how to streamline your mortgage approval process.

These red flags not only slow down the process, they could prevent you from obtaining the loan:

Borrowers buying properties separately when they are married

Refinance where the appraised value is significantly higher than the recent acquisition cost

Frequent employment changes / Recent increase in pay

Recent undocumented deposits

Lack of credit history

Recently issued social security numbers

Borrowers who have recently purchased other/multiple properties

Parties in a transaction who share a last name (buyer, seller, Realtor, loan officer, appraiser, escrow officer)

There are those out there that try to outsmart the process. There are enough checks and balances in the process, and they’ve gotten stricter in 2014. The rule books that FannieMae and FreddieMac publish for lenders to use as underwriting guidelines are called Selling Guides. These Selling Guides contain all of the secret formulas for successfully constructing a Qualified Mortgage (QM) loan. When lenders adhere to the CFPB’s Ability-To-Repay underwriting and documentation guidelines, and approve, close and sell well constructed Qualified Mortgages, then even if a loan goes bad, the lender will not have to buy it back.

That means that you the borrow will have to adhere to the underwriting guidelines and documentation requirements that are set in concrete, not pudding. So you cannot negotiate with your lender to accept almost as good income, assets or credit proof. If the income, asset or credit is not on the approved list, you will not pass go, you will not collect $200.

The important thing to take away is that a red flag isn’t necessarily a stop sign. It’s also not indicative of fraud. It just means the underwriter needs more information before moving forward.